May 13, 2007

'Servants' become the masters

What an apt title. The drum keeps beating but the politicians are not hearing, just like with everything else in America. The politicians only serve themselves, public employees, lobbyists (and the interest groups that hire them) and the taxpayers. In that order, with taxpayers outnumbering the former but way down the list in terms of influence. Why? Because taxpayers are lame (less than half vote) and never vote anyone out of office (usually as there is no one else any better to vote in)

May 13, 2007
'Servants' become the masters
Sr. editorial writer and columnist
The Orange County Register

As the presidential race gets under way, we're once again hearing the Democratic candidates ratchet up their rhetoric about the nation's great divisions between rich and poor, between those with health insurance and those without it, and between those with jobs and those on the unemployment line. I thought most people got tired of John Edwards' "two Americas" shtick during his campaign in 2004, but he is again championing this theme as he seeks the 2008 nomination.

I'll give the millionaire former senator this much: There are indeed two Americas, although the divide isn't the one that he repeatedly details.

Since the mid-1990s, American policy makers have been involved in a massive wealth transfer from the private sector to the public sector. To win the support of the powerful public-sector unions, officials at the federal, state and local levels have granted to government workers lavish retirement benefits that dwarf those of non-government workers. Here's the real divide: Between "public servants," who will be retired in their early 50s and living it up by the golf course, and private-sector workers who will be laboring until they drop over – not only to pay the bills, but to pay the higher taxes that surely will be needed to sustain the underfunded pensions promised to their government counterparts.

"As the first wave of 79 million baby boomers heads to retirement, the nation is dividing into two classes of workers: those who have government benefits and those who don't," USA Today reported Feb. 21. "The gap is accelerating in every way – pensions, medical benefits, retirement ages. Retired government workers are twice as likely to get a pension as their counterparts in the private sector, and the typical benefit is far more generous."

The newspaper quotes the Congressional Research Service, which finds that the typical government retirement is well over twice that of the typical private-sector retirement.

Government workers often also make more in salary. There are dueling statistics on public-sector vs. private-sector salaries, but the Bureau of Labor Statistics gives public employees (over the entire range of job categories) a 25-percent premium. Looking solely at federal workers, the Cato Institute explains that those in the government sector earn 56 percentmore in salary alone than those in the private sector. Public sector employees also have more days off, shorter work days, better health care benefits and so forth.

The benefit boom started when the stock market bubble inflated in the late 1990s, with unions claiming that the new level of investment returns meant higher pensions would be covered by pension fund investment gains and involve no risk to taxpayers. But what goes up must someday come down. After 9/11 happened, government unions – especially for police and fire – exploited that tragedy to increase their retirement dollars. No one could say no to potential "heroes." Meanwhile, union-dominated retirement boards continue to push for the most aggressive investments to earn the highest-possible returns. Why not? If they pan out, union members get even more benefits. If they don't, the taxpayers are stuck paying the difference.

The day of reckoning keeps getting closer.

State Controller John Chiang announced last week that California needs to start setting aside at least $2.2 billion a year to address the liability for its retiring workers; the total deficit ranges in estimates from about $48 billion to $70 billion. The state's pension deficit is at least $50 billion.

In Orange County, the public employee pension tab tops $2 billion – something made far worse after the Board of Supervisors in 2004 passed a retroactive pension spike that allows county workers to retire with a guaranteed pension equaling 81 percent of their pay after 30 years of service. Public safety workers in Orange County can retire with 100 percent of their final pay at age 53.

At these rates, pension liabilities are mounting. Some states' pension plans are on the skids and will soon require a bailout. Private pensions are in similar trouble, which is why corporate America is slashing benefits. But no such reductions have a chance in the public sector, where it's "only" taxpayer money that's at stake, and officials would rather pawn off problems to the future than face the wrath of the unions. Unlike companies, bureaucracies never go out of business, and voters rarely pay attention to these boring issues.

So it's two Americas, with the haves being those who worked in the government, and the have-nots being everybody else.

But don't worry.

A taxpayer-funded think tank at a taxpayer-funded university has released new research sponsored by a taxpayer-funded retirement system "proving" that these outsized pensions are not a problem for the state, but a benefit. As the Sacramento Business Journal reported, "The Applied Research Center at California State University, Sacramento, analyzed the impact of benefit payments to 674,000 retirees and their beneficiaries. Dr. Robert Fountain, research center director, and Dr. Robert Waste determined that the $13.8 billion in retirement benefits paid in 2006 created a $7.3 billion 'ripple effect,' for a total $21.1 billion impact." The CEO of the state retirement system reiterated the point of the study: "Retiree pension payments may seem like they are liabilities on the books of government, but, in fact, they represent billions and billions of dollars that contribute to the strength of state and local governments."

I don't know what's scarier, that professors (including one with the appropriate last name, "Waste") would engage in such pointless research or that the person in charge of the state's retirement system, with billions of dollars at its disposal, has such little economic understanding.

The argument that such liabilities are really benefits is known to economists as the "broken window fallacy." Author Henry Hazlitt told the famous fictional story, whereby a hoodlum throws a brick through a shop window. The store owner is upset, but a crowd gathers around the smashed window and starts to talk about the good things that will come from the vandalism. The money spent to fix the window will benefit a glazier, and the money the glazier gets will benefit his grocer and on and on. "The logical conclusion from all this would be, if the crowd drew it, that the little hoodlum who threw the brick, far from being a public menace, was a public benefactor," Hazlitt explained.

But ... the crowd forgets that the shopkeeper is out the money, and he would have spent it at, say, the tailor's, and the tailor would have spent it somewhere else. The broken window did not create wealth but unfairly shifted it.

Likewise, elected officials, at the behest of the unions, have been diverting billions of dollars from taxpayers and giving those dollars to union members. Certainly, one can study the effect of the money spent by those retirees. I'm sure real estate agents at Lake Coeur D'Alene, Idaho, car dealerships and the people who sell those 4-by-4 sand toys will enjoy the benefits of dollars lavished on retired government workers.

Yes, if a mugger takes the money in my wallet, there will be a boon to the liquor store where he spends it. But then I'll be out the cash, which I won't be able to spend at the local restaurant.

There simply is not enough money to pay for all the promises made to government unions and their members. As the liabilities mount, officials will be forced either to slash benefits, borrow money or raise taxes. The unions will never allow the first course of action to happen, so we're stuck with the latter two options – both of which will mean more wealth transfers from one America to the other, regardless of how some government economists try to spin it.

Contact the writer: 714-796-7823 or

No comments: